Claims ratio in a nutshell

(Updated 8 July 2024)

For trustees and portfolio managers to have an objective understanding of an annual premium increase, or even an interim increase, it is vital that the content is understood:

A buildings policy claims ratio (or loss ratio) is the ratio of claims to premiums; in other words, the percentage of claims to premium over a given period. If the loss ratio for the year is 55% it means that for every R100 of premium collected by the insurer during the same period, R55 was paid out in claims. For the insurer to make a profit or stay in business, a reasonable overall claims ratio must be achieved.

In the sectional title environment, a claims ratio of 35-55% is desirable to maintain stable premium rates. Policy costs make up approximately 30 to 40% of the premium, a loss ratio of 60% may result in a break-even position for the underwriting manager or insurer.

What does this mean?

In order better to understand the concept in practical terms, we set out an example that follows.

The sum insured amount x the rate = premium

Example: A 40-unit building that is insured for R40 million:

Sum insured: R40 million

Premium rate: 0.084%

Premium (annual): R33 600

Excess (standard): R500

R40 million x 0.0840% = R33 600

With this policy (at a rate of 0.084%), an acceptable claims ratio is 45%.

Total claims = R15 000 (three claims of R5 000 each – geyser claims)

R15 000 claims vs R33,600 premium for the year = 45% claims ratio

If three more geysers are replaced, one of which adds resulting damage for R10 000, R25 000 is added to the annual loss (R15 000 + R10 000), i.e., the claims paid amount to a total of R40 000 for the year.

R40 000 claims vs. R33 600 premium for the year = 119% claims ratio.

To get back to a 50% claims ratio, the insurer must double the premium. Alternatively, they need to reduce the claims with an increased excess structure. By increasing the excess by 30%, an unsustainable policy is corrected.

Trustees’ mandate

The trustees should receive a claims history summary upon the annual renewal of the policy. From this, they will be able to obtain their insurance rates and excesses. In the writer’s view, the trustees are mandated to negotiate excess, premium, and rate; this is where an experienced insurance broker is invaluable.

Along with the annual renewal invitation, the insurance broker should also provide a letter of advice and comparative quotes. The advice should take the loss ratio and claims history into account and should also include reference to excess and premium.

For example: A six-year-old scheme may now need to take a more careful look at their geyser excess structures. Geysers older than five will, no doubt, soon start failing and impact claims ratio which may can result in higher premiums. There are a few ways to deal with this in anticipation of claims, which involves deeper discussion or more comprehensive advice from the scheme’s broker.

Trustees, managing agents, and insurance advisors should play an active role in managing their insurance by restructuring excesses and rates to ensure that the costs are realistic and sustainable. Each building has a unique set of owners which may require a customised approach. For example, a building with many pensioners may well prefer a lower excess and higher premium to limit unexpected costs, whereas a building with many high net-worth owners may prefer a higher excess and long-term lower rates.

If the role players understand the main principles that determine the premium, they will be better positioned to negotiate the most suitable excess and rate combination for their building.